6.1 Flashcards
Equilibrium interest rates
required rate of return for a particular investment, in the sense that the market rate of return is the return that investors and savers require to get them to willingly lend their funds
real risk-free rate of interest
theoretical rate on a single-period loan that has no expectation of inflation in it.
nominal risk-free rate
real risk-free rate + expected inflation rate
Default risk.
The risk that a borrower will not make the promised payments in a timely manner.
Liquidity risk
The risk of receiving less than fair value for an investment if it must be sold for cash quickly.
Maturity risk.
the prices of longer-term bonds are more volatile than those of shorter-term bonds. Longer maturity bonds have more maturity risk than shorter-term bonds and require a maturity risk premium.
effective annual rate (EAR) or effective annual yield (EAY).
The rate of interest that investors actually realize as a result of compounding
EAR = (1 + periodic rate)m − 1
periodic rate = stated annual rate/m
Future Value of a Single Sum
FV = PV(1 + I/Y)N
annuity
stream of equal cash flows that occurs at equal intervals over a given period.
ordinary annuities
cash flows that occur at the end of each compounding period
annuities due
receipts occur at the beginning of each period
perpetuity
financial instrument that pays a fixed amount of money at set intervals over an infinite period of time. In essence, a perpetuity is a perpetual annuity. Most preferred stocks are examples of perpetuities since they promise fixed interest or dividend payments forever. Without going into all the excruciating mathematical details, the discount factor for a perpetuity is just one divided by the appropriate rate of return (i.e., 1/r). Given this, we can compute the PV of a perpetuity.
cash flow additivity principle
present value of any stream of cash flows equals the sum of the present values of the cash flows.
Descriptive statistics
summarize the important characteristics of large data sets. The focus of this topic review is on the use of descriptive statistics to consolidate a mass of numerical data into useful information.
Inferential statistics
procedures used to make forecasts, estimates, or judgments about a large set of data on the basis of the statistical characteristics of a smaller set (a sample).
A population
set of all possible members of a stated group
sample
subset of the population of interest.
4 Measurement Scales
(NOIR) Nominal scales Ordinal scales Interval scale Ratio scales
Nominal scales
Nominal scales are the level of measurement that contains the least information. Observations are classified or counted with no particular order. An example would be assigning the number 1 to a municipal bond fund, the number 2 to a corporate bond fund, and so on for each fund style.
Ordinal scales
Ordinal scales represent a higher level of measurement than nominal scales. When working with an ordinal scale, every observation is assigned to one of several categories. Then these categories are ordered with respect to a specified characteristic. For example, the ranking of 1,000 small cap growth stocks by performance may be done by assigning the number 1 to the 100 best performing stocks, the number 2 to the next 100 best performing stocks, and so on, assigning the number 10 to the 100 worst performing stocks. Based on this type of measurement, it can be concluded that a stock ranked 3 is better than a stock ranked 4, but the scale reveals nothing about performance differences or whether the difference between a 3 and a 4 is the same as the difference between a 4 and a 5.
Interval scale
Interval scale measurements provide relative ranking, like ordinal scales, plus the assurance that differences between scale values are equal. Temperature measurement in degrees is a prime example. Certainly, 49°C is hotter than 32°C, and the temperature difference between 49°C and 32°C is the same as the difference between 67°C and 50°C. The weakness of the interval scale is that a measurement of zero does not necessarily indicate the total absence of what we are measuring. This means that interval-scale-based ratios are meaningless
Ratio scales
Ratio scales represent the most refined level of measurement. Ratio scales provide ranking and equal differences between scale values, and they also have a true zero point as the origin. Order, intervals, and ratios all make sense with a ratio scale. The measurement of money is a good example. If you have zero dollars, you have no purchasing power, but if you have $4.00, you have twice as much purchasing power as a person with $2.00.
parameter
A measure used to describe a characteristic of a population
sample statistic
measure a characteristic of a sample
frequency distribution
tabular presentation of statistical data that aids the analysis of large data sets. Frequency distributions summarize statistical data by assigning it to specified groups, or intervals. Also, the data employed with a frequency distribution may be measured using any type of measurement scaleFor any frequency distribution, the interval with the greatest frequency is referred to as the modal interval.
relative frequency
calculated by dividing the absolute frequency of each return interval by the total number of observations
histogram
simply a bar chart of continuous data that has been classified into a frequency distribution.
Frequency Polygon
midpoint of ea interval horizontal axis
absolute frequency on vertical axis
straight line is drawn
